ECB Set To Join The Rate Hike Club

On Thursday, the European Central Bank (ECB) is scheduled for its monetary policy meeting in which it is expected to raise interest rates for the first time in almost 11 years. It is likely that it would make a bigger-than-flagged move because policymakers are worried about losing control of the runaway inflation numbers in the eurozone.

Rising inflation

The inflation numbers have already come close to double-digit territory, which means there is a possibility that it could become entrenched in the European economy above the 2% target set by the ECB. This requires increases in interest rates, even if slows down, or even crashes, an already fragile economy, which is dealing with the consequences of the Russia and Ukraine conflict.

However, it should be noted that the policymakers are not in agreement in terms of the magnitude of the interest rate hike. Some of them believe that the ECB is way behind the curve, particularly when global central banks like the US Federal Reserve are considered. There are also those that believe the ECB would exacerbate a looming recession with aggressive rate hikes.

Interest rate hike

Until recently, the ECB had been scheduled to increase its interest rate by 25 basis points, which was to be followed by a bigger hike in its next meeting in September. However, some sources that are privy to the discussions have said that Thursday’s meeting would also see a 50 basis points increase in the interest rate on the table. This is because the inflation outlook seems to be getting worse quickly.

While most analysts believe that the European Central Bank will hike rates by 25 basis points, they think it should go for a 50 basis points rise instead. Doing so would see its -0.5% rate reach zero. The decision has become even more complicated because of the euro, as the single currency dropped to a low of two decades against the US dollar, which has given inflation pressures a boost. This adds more reason for a bigger hike in the interest rate, even if it is a blow to economic growth.

A larger increase

Nevertheless, it should be noted that a larger increase would mean that the ECB would need to protect nations from rising borrowing rates, such as Spain and Italy, which are already indebted. Hence, they would have to have a deal for bond purchase schemes in place, which is already in the works.

A rise in the interest rates means that there is a disproportionate increase in the borrowing costs in the bloc. The ECB has promised that it is working on a new instrument to prevent this kind of fragmentation. While it is not expected that they would announce all details of the tool in question, a firm commitment is expected from Christine Lagarde, the President of the European Central Bank (ECB).

The bank is expected to provide some specifics, which include the requirements that would trigger aid from the ECB.